In cities nationwide, housing markets are tightening amid shrinking inventories while new construction projects have slowed and mortgage rates have been on the rise.  Fundamentals in multifamily and industrial look good, but why the chatter of a lending pullback? Some experts worry skyrocketing leasing and construction costs are setting markets up for the next recession. Is that so and are lenders getting prepared for a recession?

Are Traditional Banks Pulling Back?

Traditional banks that have been lobbying Congress for years since the enactment of the Dodd–Frank Wall Street Reform and Consumer Protection Act when Congress passed and the current president signed the “Economic Growth, Regulatory Relief and Consumer Protection Act” this week; lifting many of the regulations put on banks following the Wall Street and banking collapse of 2010.

Because of those regulations, banks argue that they are unable to aggressively lend to businesses. This has led to a growing market of alternative lenders that have stepped in places where traditional banks, under regulatory pressure, have had to pull back over the last several years.

The Rise of Alternative Lenders

Large banks, despite the passage of the new regulatory “relief” bill have less flexibility than alternative lenders to meet investors and developers where they need them to be. In response, big banks have largely left the playing field for startups and small businesses to regional and local small and mid-sized banks as well as alternative lenders.

Some of the biggest projects worth hundreds of millions of dollars are still largely financed through traditional banks. However, those same banks are beginning to offer products similar to those offered by alternative lenders to try to get in on the explosion of capital pouring into startups and small businesses from alternative lending sources.

Banks are “Bullish” on Multifamily

Times today are rather extraordinary in the grand scope of things. Typically the economy in a post-recession period tends to slow or slip back into a recession before it hits the ten year mark. If we do not start seeing signs of a new recession over the next year, it will mark an historic period of economic expansion post-recession.

Already, this recovery has lasted longer than any previous recovery over the last 75 years or more. It is possible that multifamily will hit that record this year. More than a half a million new units were going up at the end of last year. That alone is more inventory than has ever entered the market in the last 50 years or so and capital continues to pour into the market, leaving lenders very bullish on multifamily going into the tenth year of economic recovery.

Recession Danger Ahead

Banks just posted their highest profits in back to back years. Despite positive signs that the economy will meet the decade mark for continued expansion – the ABA’s (American Bankers Association) Economic Advisory Committee puts the odds at 15% this year but 32% next year – whether it continues depends on policy.

This year, the tax bill signed by the president is largely doled out in tax cuts to corporations and businesses which could stimulate the economy except that the CBO (Congressional Budget Office) reported earlier this year that the same tax cut bill will leave the Treasury short of cash as soon as October 2018 unless there are cuts or borrowing. If nothing happens, the more likely scenario may be several years of mediocre or stalled growth despite full employment.